Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
He told Dairy News that this would imply a higher enterprise value to earnings before interest and taxes (EV/EBIT) ratio - a metric used to determine if a stock is priced too high or too low in relation to similar stocks and the market.
"This would be great news if the valuation is true for Fonterra," says Montgomerie.
"The issue we have is that Fonterra hasn't disclosed earnings for Australia and New Zealand - only gross profit and revenue, so this makes it hard for us to have an informed view on the valuation.
"If you pro-rata the $2.2bn based on gross profit share it implies a 19x EV/EBIT multiple or 15x EV/EBIT multiple based on revenue share. Both of which are supportive for the top-end or greater of our valuation range for Mainland Group of NZ$2.5bn to NZ$3bn."
Media reports out of Australia say Bega Cheese and a European dairy co-operative, possibly FrieslandCampina, have made a A$2b bid for Fonterra's Oceania business.
Montgomerie says Fonterra has a clear preference for selling the entity in one piece.
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"At this stage, Bega is only interested in Oceania, but it would be interesting if FrieslandCampina is interested in the rest. From the outside, it seems like Lactalis is the front runner, but this is hard to call."
Fonterra farmers, who will have the final say to approve any sale, are watching the divestment process unfold from the sidelines.
Fonterra Co-operative Council chair John Stevenson says the council doesn’t have any insight into this process.
“So unfortunately, I can’t make any comments at this stage. Fonterra will be best placed to provide answers,” he told Dairy News.
Fonterra’s portfolio in Australia includes the country’s top butter brand, Western Star, and popular cheese brands, Perfect Italiano, Bega Cheese, and Mainland. Lactalis Australia has Paul brands of fresh milk, yoghurt and cream plus several top selling brands of flavoured milk and cheese.
The Bega bid means there could be a three-way battle for Fonterra’s assets. The world’s largest dairy company, Lactalis cleared a major hurdle last month when the Australian Competition and Consumer Commission (ACCC) indicated that it would not oppose Lactalis’ proposed acquisition of Fonterra’s consumer, dairy ingredients and food service businesses. The third player making a bid is Japanese food company Meiji Holdings.
However, the green light from the ACCC puts Lactalis Australia at the front of the queue.
Lactalis and Fonterra both currently acquire raw milk from dairy farmers in Victoria and Tasmania, as well as processing and supplying a range of dairy products across Australia. The ACCC decision means there are no regulatory hurdles for the acquisition.
“We looked very closely at the transaction as it will combine two of the largest buyers of raw milk in Victoria and lead to some further consolidation in Tasmania,” ACCC deputy chair Mick Keogh says.
“While we acknowledge the concerns raised by some representative bodies after careful consideration, we have determined that the acquisition is unlikely to result in a substantial lessening of competition.”
The ACCC found that across Gippsland, the Murray and Western Victoria, alternative buyers of raw milk would continue to constrain Lactalis if the acquisition proceeded.
“We found that while the industry in Tasmania is already concentrated, Lactalis has a limited presence and the acquisition would not substantially alter the market dynamics. If the acquisition proceeded, Lactalis would continue to be constrained by Saputo and, to a lesser extent, Mondelez,” Keogh says.
